Dropshipping: An industry review

With ecommerce giant Amazon announcing a net sales increase of 34 percent for the third quarter of 2017, many eyes are faced squarely on this particular market. Long-standing shipping companies are also poised to reap the rewards of the growing ecommerce trend, with London-based international financial institution Barclays recently calling FedEx a “top pick.”

Though there are many reasons why today’s consumers prefer to make their purchases online versus shopping in person, part of what makes ecommerce work so well is that many companies in this space use a different type of supply chain management to connect consumers with the products they love. It’s a process called dropshipping.

The dropshipping model

If you’re unfamiliar with this particular term and find yourself wondering what dropshipping is, the way this particular method works is unlike that of traditional commerce. With dropshipping, the products the company sells aren’t selected and purchased beforehand, then stored in some warehouse before being sent to consumers (a process referred to as wholesaling).

Instead, an ecommerce company that uses dropshipping waits until a customer makes his or her order before even purchasing the requested item or item. Once that occurs, the ecommerce business buys the goods from a wholesaler. However instead of having the items shipped to them and then forwarding them on, the ecommerce business asks that the item be shipped directly to the end consumer.

Dropshipping pros and cons

Many advantages and disadvantages come with this particular supply chain model. For instance, one advantage is that it doesn’t take as much upfront capital to start this kind of company because there is no costly inventory to purchase or large warehouse to build and staff.

Another benefit of dropshipping versus wholesale is that there is less business risk. Because products aren’t being purchased until after an order is made, there is no unsold inventory to contend with and shipping is handled by the wholesaler, so there are fewer concerns there as well.

As with any industry, dropshipping does have a few cons as well. By not stocking the items themselves, ecommerce companies who choose to dropship run the risk that they may not be able to get the items they need when their customers want them. Additionally, if the consumer can get the same products from the wholesalers themselves, they can typically do so at a lower rate.

That’s why it is so important for companies engaging in dropshipping to thoroughly vet the wholesalers they intend to use. This helps reduce the likelihood of any of these types of issues, particularly if that wholesaler has a solid reputation for being on time and having all of their items in stock.

Making dropshipping profitable

One way some ecommerce companies are overcoming a few of these obstacles is by offering stellar customer service. Amazon is a prime example of this by making items easy to return, regardless of why the customer no longer wants them.

With their $99-a-year service Amazon Prime, customers who purchase this add-on can also enjoy additional services such as free two-day shipping and access to thousands of movies, as well as some of their favorite music. This creates an even more positive customer experience, so the consumer is often willing to continue to use this ecommerce site even if they run into a snag every now and then, such as when an item is out of stock and unavailable for purchase.

Plus, Amazon has created a system that encourages their suppliers to be top of the line, resolving that issue as well. By giving the consumer the power to rate each one based on factors like performance and product quality, the motivation is there for these suppliers to exceed customer expectations if they want to continue to get high remarks and repeat business.

The future of dropshipping

With more and more ecommerce companies following a dropshipping model, it is likely that this particular supply model won’t be going away any time soon. This is great news for individuals looking to start a company, but who don’t have something to sell or a lot of money to invest.

It’s also good for the consumer who wants greater access to his or her favorite items, potentially at a lower rate or via their favorite brand. In this case, everyone wins.